What Is an LOI in Commodity Trading?
In one line
An LOI — letter of intent — is a buyer’s written expression of intent to purchase a commodity on outlined terms. It opens a negotiation rather than concluding one. Most are intended to be non-binding, but that depends on the wording, not on the word "intent" in the title.
What an LOI is
A letter of intent is the opening move. The buyer sets out what it wants, roughly on what terms, and what it proposes should happen next. The seller can then decide whether to respond with a full corporate offer.
Because it comes early, an LOI is deliberately less complete than an ICPO or an SPA. That is its function: it establishes that a serious conversation is worth having, without either side committing to terms they have not yet examined.
"Non-binding" is a drafting question
The most important thing to understand about an LOI is that its title does not determine its effect. Courts look at what a document says and what the parties did, not at what it is called.
Most LOIs are intended not to create an obligation to buy or sell, and good ones say so in terms. But it is normal and often deliberate for specific clauses to bind even when the commercial terms do not — confidentiality, exclusivity or a no-shop period, governing law and jurisdiction, and who bears costs if talks fail. If you want those to bind and the rest not to, the document has to say which is which. This is worth a lawyer, particularly on a large or long-term cargo.
What belongs in an LOI
- Buyer's legal entity — full name, registration number, registered address.
- Commodity and specification — as precise as the buyer can be at this stage.
- Target quantity — per shipment and, if a term deal, over the contract period.
- Incoterm and destination — even indicatively, since it drives the price.
- Indicative schedule — when the buyer wants first delivery.
- Intended payment instrument — what the buyer expects to open, and with which bank.
- Next steps — what the buyer is asking the seller to do in response.
- Validity and binding-effect wording — what stands, for how long, and what is intended to bind.
An LOI should never carry the buyer’s bank account details, scanned passports of directors, or a proof-of-funds document addressed to an unverified counterparty. There is no legitimate reason to need them to respond to a letter of intent, and requesting them at this stage is a recognised pattern in advance-fee and payment-redirection approaches. Sensitive documents belong at the contract stage, with a counterparty whose identity and ownership you have checked.
Where the LOI sits
The documents in a physical trade usually run in this order:
- LOI — buyer expresses intent.
- FCO — seller offers, firmly, for a stated validity.
- ICPO — buyer orders at specific terms (sometimes before the FCO).
- SPA — the sale and purchase agreement: the contract that actually binds.
- Payment instrument — LC, SBLC or agreed alternative.
- Shipping and title documents — bill of lading, certificate of origin, inspection certificate.
Real deals do not always follow that order, and plenty conclude with fewer documents. What matters is that binding terms are in a document intended to bind, and that the counterparty is verified before any of it is signed.
Where Lodfy fits
The document is only ever as good as the company behind it. Lodfy verifies the company itself — KYB on the entity, KYC on its officers, ultimate beneficial ownership, and sanctions screening against the UN, EU, UK and US lists — so you know who you are exchanging paper with before you exchange any. Our free template library includes ICPO, FCO, LOI, SPA, BCL and NCNDA drafts, and the trade glossary defines the terms that appear inside them.
Frequently asked questions
What does LOI stand for in commodity trading?
Letter of Intent. It is a document in which a buyer expresses an intention to purchase a commodity on outlined terms, opening a negotiation before any binding contract exists.
Is an LOI legally binding?
Usually it is intended not to be, and well-drafted LOIs say so expressly. But an LOI can contain provisions that do bind — confidentiality, exclusivity, governing law and costs are common examples — and a document's effect depends on its wording and its governing law, not on its title. Have it reviewed before signing.
What is the difference between an LOI and an ICPO?
An LOI expresses intent and invites an offer. An ICPO states a firm order at specific terms. An LOI is the softer of the two, though the labels are often used loosely.
What should an LOI contain?
Buyer's legal entity details, the commodity and specification, target quantity, preferred Incoterm and destination, indicative delivery schedule, intended payment instrument, the proposed next steps, a validity period, and clear wording on which parts (if any) are intended to bind.
Should I send banking details with an LOI?
No. There is no reason for a buyer's account details to appear on a letter of intent, and requests for them at this stage are a recognised pattern in advance-fee and redirection approaches. Banking details belong in the contract stage, with a verified counterparty.
This article is general information about market practice, not legal advice. Whether any particular document binds you depends on its wording and its governing law — take advice on your own contracts.